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Should I Buy Fresnillo?

Harvey Jones asks whether this is a golden time to invest in Fresnillo.

It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. So here's the question I'm asking right now. Should I buy Fresnillo(LSE:FRES)?

Silver and goldHave you noticed that everybody is getting bullish on precious metals again? It's easy to see why, with the phoney global currency war threatening to break into outright hostilities. With that in mind, is now a good time to buy silver and gold miner Fresnillo? Let's dig a little deeper.

Golden yearsYou can't print silver and gold, although central bankers wish they could. If Sir Mervyn King could quantitatively ease gold into existence, it would trade at just a few dollars an ounce, instead of $1,691, up 95% over the past five years. Silver has also shone brightly since the banking crisis, doubling to nearly $32 an ounce. That should be good news for mining companies, but it's not necessarily so. My recent attempt to play gold by investing in Vatukoula Gold Mines proved a costly flop. Still, that was a minnow, and Mexican miner Fresnillo, which listed on the FTSE 100 in May 2008, is a major player.

SilveradoFresnillo is the world's largest primary silver producer, producing a massive 41 million ounces in 2012, according to its newly published fourth-quarter production update. Mexico's second-biggest gold miner delivered record gold production of 473,034 ounces, up 5.4% on the year before, beating its target of 460,000 ounces. Production is expected to hit 490,000 ounces in 2013. But all that is gold did not glister. Production actually fell a whopping 20.6% year on year in the final quarter, knocking 2.5% off Fresnillo's share price.

Fresnillo has nevertheless had a glittering five years. Its share price has climbed from £6.52 to around £17.20 in that time, an increase of 160%. Investors have been dazzled by its rocketing earnings-per-share growth, which leapt a mighty 131% in 2009, 72% in 2010 and 41% in 2011. Unfortunately, this looks set to slow this year. Digital Look has penciled in a 6% drop in 2012, followed by an 18% increase for 2013.

Is this the way to Fresnillo?Fresnillo has a strong pipeline of projects and prospects, and its multimillion-dollar exploration program has yielded promising results, notably at its mines in Herradura, Noche Buena, Lucerito, Guachichil and Guanajuato. CEO Octavio Alvidrez says it is on track to produce 65 million ounces of silver and 500,000 ounces of gold a year by 2018. But it also faces challenges, and is looking to control costs across its business, to compensate for the rising cost of operation materials, increased stripping ratios, and longer haulage distances. Fresnillo is also ramping up its exploration budget by 15% to $270 million this year, but the extra investment could hit the dividend, which is currently 3.7%, covered just 1.1 times. Despite its robust operating performance, this stock would have to shine a lot more brightly to justify its current valuation of 27 times earnings.